Question

Nina has a convex utility of wealth function, u(x). She is contemplating two prospects, L and M, where L is a mean preserving spread of M. Which of the following statements is therefore true?
a. Nina will prefer M to L.
b. Nina will prefer L to M.
c. Nina’s ranking of L and M cannot be determined without more information.
d. Nina must be risk averse, but that is the most one can say.

Answer 1

Answer: B. Nina will prefer L to M.

Explanation:

Convex utility of wealth function, u(x) is the risk-loving consumer having a a convex utility function, it's slope gets steeper as the wealth increases making the curvature of the utility function measuring the customer's attitude towards risk

Nina will prefer L to M as she has convex utility function as risk loving.